They're Everywhere! Big Four Auditors Mixed Up In Mortgage Fraud

When I’m not wondering, “Where is my coffee?”, I’m usually curled up in a ball in the corner of my little living room filled with Latin American art moaning, “Where were the auditors?”

Me insufficiently caffeinated. Not a pretty picture.

Ugly also are the blank stares from contorted faces glaring back at me when I talk about auditors and their “good crisis.”

The largest global audit firms are everywhere - in every public company and working for the government agencies that regulate them. They’re about as welcome as a hard rain and, yet, officially necessary.

Can anyone deny that there are four firms – KPMG, Deloitte, PricewaterhouseCoopers (PwC), and Ernst & Young (auditor to Lehman) – who knew all along what was going on and never told a soul, including the SEC?

The story Bloomberg’s Tom Schoenberg tells today of Fannie Mae’s complicity in the Taylor, Bean & Whitaker (TBW) $3 billion mortgage fraud scares the bejeezus out of me. That’s because, like the little boy in “The Sixth Sense” who sees dead people, I see complicit or, at the very least incompetent, auditors everywhere. What’s even more frightening is that there are only four firms of sufficient size to audit the largest public companies and they’re getting bigger and even more powerful.

PwC was the auditor of Colonial Bank, which Farkas and TBW wrapped into the the fraud that eventually led to the Colonial's failure.

Dealbook, The New York Times, June 30, 2011: Mr. Farkas’s $2.9 billion scheme began in 2002, prosecutors say, when Taylor Bean was facing mounting losses. To hide the losses, Taylor Bean executives secretly overdrew the firm’s accounts with Colonial Bank. The lender, aiming to cover up the overdrafts, sold Colonial about $1.5 billion in “worthless” and “fake” mortgages. The government, in turn, guaranteed the bogus loans.

When Colonial started to struggle, Mr. Farkas helped convince the bank to apply for $570 million in taxpayer bailout funds. The Treasury Department initially approved the rescue loan, but ultimately withdrew the offer.

Colonial filed for bankruptcy in August 2009, making it one of the largest bank failures during the crisis.

The Bloomberg piece today tells the story of Fannie Mae’s silence about the fraud they saw at TBW.

“…more than 200 loans acquired from Taylor Bean were bogus, non-performing or lacked critical components such as mortgage insurance…Taylor Bean would have collapsed in 2002 “but for the fraud scheme,” according to prosecutors. It also survived because Freddie Mac began picking up the company’s business within a week of Fannie Mae’s cutoff…Fannie Mae management decided to terminate its contract with Taylor Bean because of “fraudulent loans” and “other serious concerns,” according to the summary document…At that point, the chronology stated, Fannie Mae could have refused to buy any more loans from Taylor Bean, blocked the company’s access to its online loan processing programs, and seized the servicing rights, shifting those contracts to another company without compensating Taylor Bean.

It did none of those things.”

Instead, according to today's Bloomberg article, Fannie Mae’s confidential treatment of the termination of their agreement with TBW allowed the mortgage originator to sell the mortgage servicing rights to GMAC for $27.6 million on May 31, 2002.

KPMG was also the auditor for two other fraud-ridden mortgage originators – Countrywide, bought by Bank of America who just announced a multi-billion dollar settlement with investors over bad loans and New Century who went bankrupt over bad loans.

Deloitte, Fannie Mae’s auditor ,was also auditor of three other housing related companies that had issues: Beazer, Novastar, and American Home. Deloitte settled to get out of those messes. And Deloitte audited three no-longer-independent large firms sunk by bad mortgages: Merrill Lynch, Bear Stearns, and Royal Bank of Scotland.

As recently as 2009, the Bloomberg story tells us, regulators found bad loans sold by big banks to Fannie Mae.

Fannie Mae’s fraud department looked at $1 billion in suspect loans in 2009 and found $650 million to be fraudulent, according to William H. Brewster, director of Fannie Mae’s mortgage fraud program. Brewster told the Financial Crisis Inquiry Commission that the loans were bought from lenders such as Bank of America Corp. (BAC), Countrywide Financial Corp., Citigroup Inc. and JPMorgan Chase & Co.

Countrywide, as already mentioned, was audited by KPMG before being absorbed by Bank of America during the crisis period.

Citigroup is also audited by KPMG.

Freddie Mac, who picked up on the TBW business where Fannie Mae left off, is audited by PwC, who also audits Bank of America and JP Morgan Chase.

PwC also audits the Federal Home Loan Banks (FHLB). They ended up with many of the flawed Fannie Mae and Freddie Mac mortgage backed securities packaged from these fraudulent originator loans. FHLB members are now suing the big banks to force repurchases under representation and warranties clauses and other claims.

Two-time finalist for Gerald Loeb Award - this year for Forbes magazine work and in 2010 for online commentary and blogging. I am a C.P.A. and freelance journalist with credits in the Financial Times, Boston Review, American Banker, Columbia Journalism Review, Accountancy Ag...